According to a Sallie Mae study, more than 84% of college students have credit cards and 20% graduate owing more than $7,000.
Although it can be a good thing to open credit cards early in life, collecting debt that you cannot repay is never good.
At 18, your child can get a credit card without your consent.
Start talking to your children about the importance of financial security before they begin making uneducated decisions on their own. This should happen before they go to college for the best chance of financial success.
- Start the conversation early – As soon as your child is old enough to understand the concepts of earning, borrowing and paying, it’s time to start talking about credit. Explain the fundamentals of credit cards and how they work, including repayment plans and interest rates. You’ll find that life is full of teachable moments, so continue the conversation whenever you see an opportunity to reinforce positive behaviors or warn about negative ones.
- Explain how credit scores work – With a basic knowledge of how credit cards work, your child may soon be ready to learn about credit scoring. This conversation can become very detailed, but it’s okay to start with the basics. Let your child know that these bureaus are monitoring how you use credit and you are graded on their assessment, much like you would be graded on an exam.
- Help Her Build New Credit – Every child is different, so there isn’t a magic age where it makes sense to give your child a credit card. If your child is mature and shows that he or she is responsible with money, you may want to co-sign on a card while he or she is still a minor. This will give your child a head start on building credit. By the time he is 18, he could already have built new credit that will increase his credit score.
- Start a Savings Account – Children under the age of 18 cannot legally open a savings account on their own, but you can open a joint account for your child at any time. Having her name on the account will give her some flexibility to make financial decisions, and because you are involved in setting up the account, you can open a dialogue about how to save money. The way you approach this will depend on your child’s age and your own preferences, but you should offer some guidance on how your child uses the account. For example, you may require that all money goes into the savings account before any purchases are made. Review the balance regularly and discuss things like future purchases and how to save more money.
If you want a savings account that your child cannot access, consider a 529 College Savings Plan. This is a state-sponsored program available in many states. You can contribute to this savings plan without being taxed.
- Start a Retirement Savings Account – It may seem premature to start saving for retirement when your child is still in diapers, but this is one small thing you can do to help secure her financial future. There’s now a kid-friendly Roth IRA that parents can fund before their kids even enter the workforce. Parents can save money for their children’s retirement tax-free, as they would with a standard IRA. The account may continue growing as the child grows. As your child begins working, propose matching all or some of the money she invests throughout college.
- Create a budget and task them to report back – For many children, college is the first time they are living away from home. With such freedom comes responsibility that some are simply not prepared to handle. You can help by getting involved with creating and maintaining a budget. This is especially prudent if the child is receiving an allowance.
- Create an investment portfolio – You can start investing in mutual funds on your child’s behalf at any time. However, since this is a long-term investment, try to keep the risks on the low to moderate side.
One of the greatest gifts you can give your child is financial intelligence. When he understands how and why he is making smart financial decisions, he is more likely to continue following that pattern.
The simple act of opening a dialogue about finances sends the message that money is never a taboo topic. Armed with a healthy attitude towards finances, your child is less likely to accumulate crippling debt and more likely to achieve financial success.
Contributor: Trevor McDonald